Taxation and Remote Employees
The Covid-19 pandemic forced many businesses into remote working arrangements well before anyone was prepared to address issues of teleworking employees. What began as a temporary workforce solution for some businesses has given rise to more remote employment opportunities opening for employees, including work from home arrangements with employees living in other states. This raises important questions for employers regarding their obligations under state income tax and withholding laws.
At the start of the pandemic, Pennsylvania, for example, issued guidance permitting employers essentially to ignore remote work for tax purposes, so Pennsylvania businesses could continue to treat remote employees as working in their normal location for purposes of withholding. However, the application of this temporary guidance expired June 30, 2021, and employers should review to ensure they are withholding correctly for teleworking employees.
Generally, Pennsylvania taxes apply to compensation of all Pennsylvania residents, and Pennsylvania employers must withhold Pennsylvania taxes for a Pennsylvania resident employee regardless of where the income was earned. For a non-resident employee, Pennsylvania taxes only apply if the services were performed within the Commonwealth. However, Pennsylvania has adopted a “convenience-of the employer” doctrine, which allows remote work performed outside of Pennsylvania by a non-resident of Pennsylvania to be taxed at the Pennsylvania rate in some circumstances.
Under the “convenience-of-the-employer” doctrine, when a non-resident employee performs services both within and outside Pennsylvania, and the days worked outside Pennsylvania are not based on the necessity of the employer, Pennsylvania income tax will apply to all of that employee’s compensation. Alternatively, if the non-resident employee lives in a state that has a reciprocal agreement with Pennsylvania, then the “convenience-of-the-employer” doctrine does not apply. These states are Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia, which all agree that a non-resident employee’s compensation will only be taxed in the employee’s state of residence regardless of where the work is performed.
Maryland also has reciprocal agreements with Virginia, West Virginia, and the District of Columbia. Generally, if an employee’s income is sourced in Maryland, then Maryland state income tax and withholding applies regardless of whether the employee is a resident of Maryland or another state. However, if a non-resident employee’s state of residence has a reciprocal agreement with Maryland, then the Maryland employer must withhold the state income tax of the non-resident employee’s state of residence instead of Maryland. For example, if the employee is a resident of Virginia and teleworks in Virginia, Virginia income tax and withholding applies, and there is no Maryland withholding obligation.
Employers who continue to allow remote working arrangements should carefully review this issue with a tax practitioner and/or reach out to our Team at Support@shumakerwilliams.com with any questions.
The information contained herein is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this blog should be construed as legal advice from Shumaker Williams P.C. or the individual author; nor is it intended to be a substitute for legal counsel on any subject matter. This blog is current as of the date of original publication.
January 25, 2023